Tuesday, September 30, 2008

How we got in this Financial crisis and how Americans were scammed

Many people would argue that this collapse has been brewing since the Federal Reserve Act of 1912, which this started the Fiat currency system in the U.S., in which allowed the government and banks to create money out of thin air.

However, I believe it is more directly related to the Community Reinvestment Act of 1977 & the Financial Services Modernization Act of 1999 which allowed banks to hand out very risky loans and removed regulations that were put in place during the great depression. What a great idea, ey? It might of actually never created a crisis if human beings were not inherently greedy, but I think we already learned that lesson right before the depression days.

So, right around 2002 the housing industry started BOOMING for "unknown" reasons (note the sarcasm). Countrywide, one of the biggest mortgage companies in the U.S. actually advertised their "No doc" and "Low doc" loans on their website, which allowed people with no proof of income to possibly buy a house worth around $350,000. These were called "No Doc Jumbo loans". Mortgage companies also used various methods of selling bad credit loans, by using things like "teaser rates", 3 & 5 year ARMs, and my favorite "Interest-only" loans. They all seemed to accomplish the same thing... get homebuyers into houses they most certainly can't afford. However, Countrywide did finally stop advertising "No Doc" loans a few months ago when they went under and were bought out by Bank of America.

On top of all this, banks were trading these Mortgage-Backed securities (MBS) and dug themselves an even deeper hole with these high-risk loans that they thought they were getting great returns on. It the meantime, ratings agencies (Fitch, Moodys, S&P) were helping these banks disguise the risk of these loans by overrating them and therefore enabling the easy sell of these securities to investors.

When you have several Money managers, such as John Paulson, making Billions off this entire mess over a year ago... its really hard to believe that this was all NOT a deliberate scam. I hope they enjoy there billions while the rest of us are left to clean up the aftermath.